Enduring a flu pandemic: life/health insurers and reinsurers, who know a lot about risk management, believe they will be able to manage and emerge from a severe avian flu pandemic better than other businesses.

The H5N1 virus is likely to soon reach North America by means of migratory birds. It was first detected nine years ago in poultry in Hong Kong, and it has spread through much of Asia and, more recently, into Europe and Africa. If it mutates into a form that can spread among humans, it could set off the first major worldwide pandemic since 1918.

What effects would such a pandemic have on the life and health insurance industries? Significant, to be sure. But industry members are confident they could weather any crises a pandemic could deliver.

"We regard this as a possibility at this point, not a fact," said Lisa Tate, senior counsel for the American Council of Life Insurers. "There's been no human-to-human transmission. If there's any industry that is well prepared for it, it's the life industry."

Health insurers would be less affected by a pandemic, industry officials believe. That's because healthcare claims would be capped by the inability of the system to treat everyone affected by the flu virus. Also, treatments would be for relatively short periods.

In a typical year, about 36,000 Americans die from influenza strains. But a recent report by the Insurance Information Institute cited an extreme worst-case scenario that could generate 16 million deaths and a stunning $133 billion more in death claims than life insurers ordinarily would expect.

Could the U.S. life industry absorb such a blow? The answer, according to Tate, is yes. She said the ACLI has calculated that the life industry has more than $4 trillion in assets and $250 billion in capital and surplus. "So I think we're in good shape, but we're not taking this lightly in any way," she said.

The U.S. Department of Health and Human Services' worst-case scenario projects 1.9 million deaths, according to the Institute.

Impact by Industry Sector

Steven Weisbart, author of the III report and holder of a Ph.D. in economics, said life reinsurers might be the hardest-hit segment of the life and health industries because the reinsurance market is more concentrated than the direct market. "There are less than a dozen companies that do a great deal of the life reinsurance," he said. "So all of the reinsurance claims would flow to one- or two-dozen companies. They could be hit by anywhere in the world that life policies were exposed to flu deaths."

Direct writers of group life insurance would be next in line on a vulnerability scale, Weisbart said. Group life is essentially one-year term insurance for which reserves are relatively low and net amounts at risk are high, he said. A greater portion of individual life insurance is made up of permanent products with cash values, which lower the net amount at risk, so Weisbart expects the individual line would be less impacted by a flu pandemic than group life.

Weisbart estimated that probably 10% of life insurers are rated as fairly vulnerable by the independent rating agencies. "So the financially weak companies would have problems, probably in the case of a moderate pandemic, but certainly in the case of a severe one," he said.

Business Continuity

The ability to pay claims is only part of an insurer's responsibility. Another risk is its ability to continue doing business during a pandemic, when its own employees and business partners may be sick or are taking measures to isolate themselves from spread of the illness, said Dean Abbott, a vice president and senior actuary at ING Re.

"Many businesses today have business-continuation plans or crisis-management plans," said Abbott, who is also risk officer focused on group reinsurance. "ING and other companies are including the avian flu in their business-continuity plans. If they're not already finished, they are in the midst of trying to figure out how to do it. If the pandemic were to begin today, a number of insurers would he prepared, and with each passing month, more and more would be. As an industry, we're ahead of the curve."

These plans often lay the groundwork for employees to work from home by virtue of company-issued laptops or other telecommuting techniques. Some employees--managers and those in charge of facilities or information-technology networks--would still be at their work sites to keep the facilities running, Abbott said.

Any quarantine period is expected to last about two months, said Alden Skar, another ING Re vice president and senior actuary. "So it's not a question of whether they'll be able to get the claims paid," said Skar, who focuses on health, medical and managed-care reinsurance. "It's a question of whether they're going to be able to meet their 30-day turnaround. They may miss it, but they're not going to ignore the claim."

Not all employees at ING Re, and presumably at other companies, probably know exactly what the business-continuation plans are. "ING Re makes sure people critical to a particular function are involved in business continuity," said Abbott. "Others will be informed via a phone call about what they need to do and where to go to do their jobs."

On a dollar basis, the individual life area would be hardest hit. Estimates range from $50 billion to $80 billion for a severe pandemic and $20 billion for a moderate pandemic. Group life may incur claims of about $50 billion for severe and $10 billion for moderate. But on a relative basis, individual writers may pay two to 2.5 times expected annual claims, while group writers may pay three times the norm. And the financial-statement effect would be greater on group life writers because they hold smaller statutory reserves for that business than do individual life writers, Abbott said.

Health Insurance Effects

Skar said the traditional health-care delivery system "would be quickly overwhelmed" by a flu pandemic. "We'd be in a situation in which people would be receiving health care wherever they could find it," he said. During the 1918 Spanish flu pandemic, many people found treatment in school gymnasiums, and the Red Cross was the provider. "That's not to say health insurers would be off the hook," he added. "Hospitals, clinics and physicians' offices would be at capacity, but because so much of the care would come from nontraditional or noninsurance sources, the effects wouldn't be nearly as taxing on the health insurance industry on a relative basis as what it might be on the life insurance side."

Too many people would want to get into hospitals, but there would not be enough beds, ventilators and other resources that are needed to care for the sick, Skar said. Potentially exacerbating the situation would be the chance that health-care providers themselves would become sick or would consider hospitals too dangerous. Skar said hospitals might have to issue not only masks to providers, but entire body suits.

Based on the 1918 experience, a pandemic today is expected to occur in two or three waves over a 12- to 18-month period. In 1918, most deaths occurred in the second wave, Abbott said.

Reinsurers at Risk

What might happen to reinsurers depends on how their business is written. ING Re primarily writes on an excess-of-loss basis ha health insurance as opposed to quota share. Typically, claims must exceed $200,000 per individual for the reinsurance to kick in. The excess business, particularly for health insurance, would probably suffer only limited adverse effects. "Either the people who are ill will recover in weeks or months, or they will die," said Skar. "If you're in the hospital for a few weeks, you may generate claims that take you up to $200,000, but it's not very likely." Quota share coverage, however, would experience results similar to those of the direct writers, Skar said.

In group life, ING Re reinsures an excess layer of risk that generally covers higher-salaried employees. Since there is no evidence a flu pandemic would hit this group any less than other economic groups, Abbott said he expects reinsurance claims to be similar to those of direct group writers.

On the individual life side, many reinsurers use first-dollar quota share for term insurance and a yearly renewable-term basis for some permanent business, such as universal life, said Abbott. That leaves reinsurers with more exposure.

Money for Claims

Money to pay life and health claims industrywide likely would come from several sources, according to Weisbart. Some will be from the assets that match liabilities. Some would come from a reduction in policyholder or stock dividends. Surplus funds to some degree would be available, but not totally since companies that have other lines of business would need to have reserves and surplus to support those other lines.

Many assets would have to be sold for cash, so if the pandemic impairs investment markets, insurers would be forced to sell at low prices. But based on historical analyses, that probably would not happen, said Weisbart. During the worst of the 1918 pandemic, for example, the stock market rose and "virtually ignored the staggering number of people infected and high death toll," Weisbart wrote in his report. And during the peak of the SARS outbreak in 2003 in Canada, the Toronto Stock Exchange index rose strongly, though more slowly than the S&P 500 in the United States. Although the effect of an avian flu pandemic could be different today for any of a number of reasons, Weisbart wrote: "At the very least, the conventional wisdom--that a significant outbreak of avian influenza will lead to financial market collapse--is suspect."

Some sectors of the economy that involve the congregation of people, such as airlines, would be "pretty badly hit," he said in an interview. "Other sectors probably would not be hit much at all. Energy might be a good example. So a well-diversified investment portfolio wouldn't be hit too badly."

Long-Term Effects

Of course, insurers would find themselves low on capital after paying claims. But that would likely be only a temporary problem. Weisbart projects that insurance rates would go up, at least for a short time. That, in turn, would help to attract new capital because unless there's another pandemic type of event, life companies would become profitable and certainly able to reward their new investors.

Reinsurers, too, would be fine. A pandemic would allow them to raise reinsurance rates. That would attract new capital to the existing reinsurers or bring new reinsurers into the market, Weisbart said. That is what happened after the terrorist attacks and is happening since the Katrina hurricane.

A pandemic could spur demand for life products. Abbott said record life sales occurred "after the 1918 pandemic because people saw the need for life insurance. To a lesser extent, there was greater demand after the 2001 terrorist attacks.

Monitoring Outside Parties

While Tate considers the industry well-prepared, she said the ACLI is concerned about forces outside the companies. One major concern is whether telecommunications networks will be available so that insurance employees could work from home. The association also is working to ensure that member companies are aware of what federal and state governments are doing in terms of making resources available.

Tate said the federal government has been taking "a very strong, proactive, multidepartmental approach" to a flu pandemic. "They have pulled in Homeland Security and the Department of the Treasury, which is of particular significance to us. They have been working with the health departments and the Centers for Disease Control. Interestingly, they've also pulled in medical experts from the military, which have traditionally been at the forefront of finding ways of coping with tropical diseases that might affect the armed forces."

States, too, have been active. Tate cited Maryland for a recently held summit on how to respond, Arizona for comprehensive planning, and such projects as Chicago First and Florida First, which are regional-based groups that coordinate with the financial sectors and government policymakers and fire and health departments. She said the ACLI is helping to put one together for the national capital area.

Tate also cited the insurance industry's geographical dispersion and that many insurers are able to operate independently. "Our membership is sufficiently diverse that there's no one-size-fits-all answer" to questions about preparing for a flu pandemic. "Our impression is that our member companies are very well aware of what their portfolio policies are, and they've been taking steps to ensure they have reserves in place to handle whatever they need," she said.

Key Points

* Reinsurers could be most affected by a pandemic due to the concentration of the business among fewer than a dozen or so major companies. And those companies insure lives outside the United States, too.

* Health insurers might be least affected because the health-care industry has very little surge capacity.

* To pay claims, insurers might have to sell assets into a weak economy.

Pandemics as Biological Catastrophes

* 31 PANDEMICS in the past 500 years.

* 3 PANDEMICS in the past century.

* 1918-1919 SPANISH FLU KILLED 20 million to 40 million people worldwide and 500,000 in the United States.

* THE SPANISH FLU AND THE AVIAN VIRUS (H5N1) strains share disturbing characteristics.

* FATAL and hitting the healthiest people hardest.

Source: ING Re

Different Approach for Small Direct Writers

An avian flu pandemic presents risks for every kind of insurer. But what if you are a relatively large regional direct writer of term life policies, like Savings Bank Life Insurance of Massachusetts?

The company has given the issue some thought and has set up a task force to address its business-interruption risk, said May Lee Low, chief actuary. But it also has some reasons to feel secure.

One is its high level of first-dollar, quota-share reinsurance, and another is the company's relatively low retention limit. "Every policy that we have at risk, reinsurance takes a significant portion of it," said Low.

The company also considers its geographical risk footprint a positive. "We are not in New York," she said. "We are in 15 states, mostly New England, and our major city is Boston. A pandemic, she said, would tear through major metropolitan areas with lots of foreign travel "like wild fire." Air travel would spread the virus more quickly, she said.

One protection the company would like to have is stop-loss reinsurance coverage. "We are looking to do that, but the market is quite tight right now, or you have to pay higher costs for it," she said. "We are looking into private markets to get a policy for ourselves."

Low said she expects that a pandemic would help people to better understand the importance of life insurance and would cause sales to rise in the short term. But she does not expect it to result in higher prices, at least not for the long term. "The pricing would be based on what is expected in mortality in the future," she said." A pandemic is not like heart disease or cancer. It would cause a blip, but it's not something that would affect life expectancy forever."

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Savings Bank Life Insurance Company of Massachusetts

A.M. Best Company # 06696

Distribution: Banks, direct response

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Individual Life Insurance Ownership in the United States
And Projected Claims From an Avian Flu Pandemic

Age Range                                       Under 35       35-44

Number of households, in millions                   13.9        17.5
Percent who own individual life ins.                 33%         46%
Households with individual life, in millions         4.6         8.1
Household total death benefit                   $230,700    $534,200
Death benefit per individual *                  $155,000    $360,000
Projected deaths                                 248,400      14,580
Projected claims, in billions                     $38.50       $5.20

Age Range                                          45-54       55-64

Number of households, in millions                   17.9        17.1
Percent who own individual life ins.                 59%         57%
Households with individual life, in millions        10.6         9.7
Household total death benefit                   $226,900    $160,100
Death benefit per individual *                  $152,000    $107,000
Projected deaths                                  19,080      34,920
Projected claims, in billions                      $2.90       $3.70

                                                 65 and
Age Range                                          over

Number of households, in millions                  12.7
Percent who own individual life ins.                60%
Households with individual life, in millions        7.6
Household total death benefit                   $92,500
Death benefit per individual *                  $62,000
Projected deaths                                456,000
Projected claims, in billions                    $28.30

Group Life Insurance Ownership in the United States and
Projected Claims From an Avian Flu Pandemic

Age Range                                       Under 35       35-44

Number of households, in millions                   13.9        17.5
Percent who own group life insurance                 50%         65%
Household total group life death benefit        $145,100    $229,500
Death benefit per individual *                   $97,200    $153,800
Projected deaths                                 375,300      20,475
Projected claims, in billions                     $36.50       $3.10

Age Range                                          45-54       55-64

Number of households, in millions                   17.9        17.1
Percent who own group life insurance                 62%         53%
Household total group life death benefit        $152,600     131,300
Death benefit per individual *                  $102,200     $87,900
Projected deaths                                  19,980      32,616
Projected claims, in billions                      $2.00       $2.90

                                                65 and
Age Range                                         over

Number of households, in millions                 12.7
Percent who own group life insurance               29%
Household total group life death benefit        66,500
Death benefit per individual *                  44,600
Projected deaths                                20,800
Projected claims, in billions                    $9.80

* Two-thirds of household members, since some households have only one
or two earners

Source: Steven Weisbart, Insurance Information Institute

Avian Flu: Estimated
Deaths by Age Group

Based on current population and
deaths in 1918-1919, many people
from ages 25 to 44 would die,
which is contrary to experience
from normal influenza.

Age in Years    Projected Deaths

<5                       233,200
5-14                      74,553
15-24                    214,582
25-34                    378,639
35-44                    268,602
45-54                     43,948
>65                      426,689

Source: ING Re